Passive Income Relief

January 2018

Announcement by Federal Government: Passive Income Relief

Dear TPC Financial Group Ltd. clients,

As part of our commitment to professionals and business owners across Canada, our office has been doing our best to keep all parties informed of ongoing developments related to Bill Morneau’s proposed tax changes, as well as to help spread information to the general public about the impact of these changes.

Today on October 18th, exactly three months after Bill Morneau released his discussion paper regarding proposed tax changes for private corporations, further information has been provided by the Federal Government.

PASSIVE INCOME THRESHOLD

The finance minister has announced that for passive income inside a corporation below a $50,000 threshold, there will be no increase in taxation, and all passive income would be subject to current tax legislation. The $50,000 threshold corresponds to approximately $1M – $1.5M in investable assets, depending on dividend yield and overall allocation. This ensures that a corporation can continue to accumulate funds within a corporate investment account for the purpose of helping save for retirement.

EXISTING INVESTMENT ACCOUNTS

What was interesting in the federal government’s announcement is that these changes are to take place on a “go-forward basis”. They specifically mentioned that investments already made within a private corporation, including future income earned from these investments, would be protected from the new rules. How they plan on administering any of these changes has yet to be determined.

TPC FINANCIAL GROUP LTD. COMMENTARY

When the tax changes were first proposed, initial discussions from the federal government were targeted at completely eliminating any refundable tax on passive income. This would see a tax increase of 38.33% on Canadian dividends received by a corporation, and approximately 50% on other passive income (depending on province).

By announcing $50,000 in passive income as a threshold for existing rules, business owners across Canada will still be able to use their corporation as a valuable savings tool. As mentioned previously, a significant portion of retirement savings can be held within a corporation without seeing punitive taxation.

With existing investment accounts being grandfathered according to Mr. Morneau, many will breathe a sigh of relief knowing that the hard work and planning that has been done in years past will not be compromised. Moving forward, there are likely to be some changes to the best way to allocate corporate investments.

As these new changes target income over $50,000, there may be an opportunity to rely on growth based equities within a corporation to keep corporate taxation at a minimum. It is likely that RRSP’s will also play a larger role in ongoing savings and investments, however, so long as contribution limits and forced withdrawals persist, the flexibility of corporate investments are likely to be the preferred savings vehicle for business owners and professionals.

MOVING FORWARD

There has yet to be any announcement with regards to the non-taxable portion of capital gains within a corporation. New changes with respect to income splitting have yet to be announced, except that they are going to modify their reasonableness test.

How, and when these new rules are implemented has yet to be released. Specific details relating to these proposed measures are to be released as part of the Federal Government’s 2018 budget, however, we expect more information relating to all of the aforementioned items to be available in the coming weeks. TPC Financial will endeavour to keep everyone informed as best we can.

If you have any questions, please do not hesitate to contact your TPC Financial Group advisor.